NORTH AMERICAN INTEGRATION AND DEVELOPMENT
by UICIFD STAFF
April 2001
United States-Mexico Chamber of Commerce, (NAFTA Forum Series), Private Sector Opportunities in Mexican Energy (Oct. 1998), available at http://www.usmcoc.org/n9.html
This article by the United States-Mexico Chamber of Commerce expresses a belief that the gradual opening of certain energy activities in Mexico to the private sector will provide exceptional opportunities for energy companies from Mexico, the U.S., and other countries. Although Mexico will face significant public investment constraints in developing its energy sector over the next decade because of constitutional restrictions, the Chamber believes that Presidents Salinas and Zedillo have made significant progress in freeing certain energy areas away from the “core” of oil exploration and production. Mexico’s Constitution establishes the nation’s exclusive right to exploit hydrocarbons, provide public electric power service, and manage nuclear fuels. Mexico nationalized its oil industry in 1938 by creating Pemex, the state’s monopoly in oil production. This article discusses investment opportunities in petroleum, natural gas and electric power sectors. Petroleum opportunities exist because the government procurement chapter of NAFTA allows U.S. companies to develop business relations with Pemex, while the energy chapter maintains the state-owned monopoly. The investment chapter and the Federal Electricity Commission (CFE) provide protection for U.S. companies where investment is permitted. Natural gas opportunities exist as a result of a 1995 law that opened up natural gas transportation, storage, and distribution to private investment while keeping production in the hands of Pemex. Electric power opportunities are available as a result of Mexico’s changing its basic law on electricity in 1992, consistent with the energy chapter of NAFTA, to permit private investment in electric power generation in self-supply, cogeneration, independent power production and export and import of electricity. The article concludes by recommending that the Mexican government continue to be aggressive in defining areas within the energy sector, where private investment can play an important role.
United States-Mexico Chamber of Commerce (NAFTA Forum Series), Environmental Issues in Mexico Under NAFTA (May 1998), available at http://www.usmcoc.org/n10.html
This article by the United States-Mexico Chamber of Commerce describes the impact NAFTA has on Mexico’s environment, and examines the opportunities for U.S. environmental technology firms to export solutions to Mexico. It also highlights many of the institutions that are working to improve Mexico’s environment. The Chamber says that Mexico faces severe environmental degradation due to its many years of rapid population growth and industrialization, without adequate environmental investment and enforcement. NAFTA opponents believe that increased trade could lead to further environmental degradation in Mexico because companies may have an incentive to move their operations to Mexico to avoid strict environmental enforcement in the United States. Since NAFTA’s inception, the Chamber believes this opposition is countered by Mexico’s beginning to enforce its environmental laws for new companies. The application of environmental laws takes away the incentive to relocate to Mexico for purposes of avoiding environmental regulations in the U.S. The article also examines enforcement by looking at institutions and plans such as the Zedillo administration plan and the U.S.-Mexico Border Cooperative Arrangements. The article concludes by saying that NAFTA is helping Mexico solve its severe environmental problems in two ways. First, NAFTA has helped Mexico to achieve a dramatic recovery form the major recession caused by the peso devaluation about a year after NAFTA was implemented, thereby enabling Mexico to afford more ambitious environmental programs. Second, there is a number of bilateral and multilateral institutions, which focus on cross-border environmental issues, particularly along the U.S.-Mexican border. The U.S. and Mexican governments have deepened cooperative arrangements under the Border XXI process. The Chamber also feels that Mexico is on the right track to addressing its environmental problems by the use of regulations and economic incentives, which encourage businesses to move toward cleaner technologies.
Geri Smith & Elisabeth Malkin, Mexico’s Makeover: Five Years after NAFTA the Country is Turning into an Industrial Power Whose Workers and Exports are Becoming Increasingly Sophisticated, Business Week, Dec. 21, 1998, available at http://www.businessweek.com/1998/51/b3609018.htm
The Article reported that five years after NAFTA Mexico’s economy is undergoing a stunning transformation. Mexico is rapidly changing from a mere assembler of cheap, low quality goods into a reliable exporter of sophisticated products, from auto brake systems to laptop computers. Since 1993, exports have doubled to $115 billion. It exports twice as much as Brazil with an economy half as big. Before NAFTA, 21,000 Mexican companies exported their goods. Now the number has risen to over 35,000. Manufactured goods now make up 90% of Mexico’s sales abroad, up from 77% in 1993. NAFTA is bringing thousands of jobs to Mexico that had been lost from North America to Asia when U.S. and Canadian companies shifted production to lower cost production sites in the last decade. IBM is now making computer components in Guadalajara formerly made in Singapore. In addition, European and Asian multinationals are pouring billions into Mexico’s economy. Companies from Samsung to Daimler Benz to Dupont have opened factories or expanded existing operations. Mexican foreign direct investment has soared from $4 billion in 1993 to well over $10 billion. Significantly, the foreign investments are no longer mainly maquiladoras, assembly plants along the U.S. – Mexico border, but sophisticated factories scattered throughout the country. Foreigners are not only attracted by Mexico’s low cost labor and duty free access to the U.S. market, but as important are the NAFTA guarantees that foreigners have the same rights as Mexican investors and that Mexico will continue on its free market course.
Mexico’s industrial makeover goes far beyond export and investment numbers. Mexican managers at all levels of business are becoming more confident as they respond to heightened competition at home and to the tough demands of foreign customers. Joint ventures with foreign companies have made Mexican executives more accountable to shareholders. NAFTA has nurtured an elite new class of skilled workers who earn up to two-thirds more than other Mexican factory workers. Explosive growth has happened in the auto industry all over Mexico and in the electronics belt around Tijuana on the U.S. border. Mexico’s auto industry has become fully integrated with the U.S. NAFTA has also been a boost to more traditional industries. Furniture exports have risen over 25%. Agro- industry is gaining momentum and Mexican service businesses are processing U.S. credit card data and airline tickets as well as creating custom-made software for U.S. corporations that once farmed out such work to India. NAFTA rescued Mexico’s declining textile industry by eliminating U.S. tariffs and quotas. In 1996 Mexico over took China as the largest supplier of textiles and garments to the U.S. Now Mexico is producing not only garments but also high-quality textiles and U.S. firms are rushing to invest.
Despite this great change Mexico is still two economies. The one benefiting from free trade has greatly expanded by a sharp increase in manufacturing employment. The other economy suffers from a chronic shortage of jobs, with millions subsisting on part-time work in the informal economy. Mexico needs to generate 1 million new jobs each to absorb young people entering the job market. While most Mexicans, even leftist politicians who opposed NAFTA, believe that it has helped the country it has also exposed some of the failures of Mexican society, particularly in education. NAFTA has not proven to be of great help to Mexico’s masses of unskilled, poorly educated workers.
Noam Chomsky, Notes on NAFTA: The Masters of Mankind, available at http://db.uwaterloo.ca/~alopez-o/politics/chomnafta.html
Noam Chomsky is one of the leading left-wing critics in America. This article equates the circumstances of the present day with the 17th century observations of the icon of free-market capitalism, Adam Smith, of “the vile maxim of the masters of mankind” that operates in “the invisible hand” of the market that democratic governments must control to keep them from destroying themselves and the community. “All for ourselves, and nothing for other People.” In Smith’s day, these masters were the “merchants and manufacturers” that were the “principle architects” of state policy that brought forth “dreadful misfortunes” during the industrial revolution. In our day, according to the author, the modern masters are the transnational corporations and the multinational financial institutions that are riding the ascendancy of neoliberal capitalism to dominate the structuring of a world economy. Chomsky makes a number of observations about “free trade”, “free-market capitalism” and the multinational financial institutions that provides a provocative framework in which to understand the GATT and NAFTA. He starts by observing that “international trade” is “a dubious term for a system in which some 40% of U.S. trade takes place within companies, centrally managed by the same highly invisible hands that control planning, production and investment.” He observes that very often “free-market capitalism” is much more risk-free for the modern masters than for the less powerful. Protectionist measures by the developed countries along with programs dictated by the IMF and the World Bank have helped doubled the gap between rich and poor countries since 1960. Chomsky sees a “defacto world government” being created in the “new imperial age” designed to serve the interests of transnational corporations, banks and investment firms, in the global economy immune from public influence.As Chomsky also observes, NAFTA and the GATT are not only about free trade. Even more importantly, they are about the protection of intellectual and other property and the freedom to the unrestricted investment of capital. According to Chomsky, such measures are designed to ensure that large multinational corporations will control the technology of the future that will allow protected private enterprise to control health, agriculture, and the means of life. These agreements impose a mixture of liberalization and protection designed to keep wealth and power firmly in the hands of the modern masters. The basic goal of these modern masters is “a worldwide business environment that is unfettered by government interference.” Profits are the predominant human value to which all else must be subordinated. These agreements override the rights of workers, consumers and the future generations who cannot “vote” in the market on environmental issues. They keep the public “in its place.” Chomsky believes that these agreements did not have to end up this way. In their present form, they are a natural consequence of the great successes of these modern masters in using globalization to reduce “democracy to empty forms so that the vile maxim of the masters can be pursued without undue interference.”
George DeMartino, Foreign Direct Investment, Vol. 3, No. 14 (Eds. Tom Barry and Martha Honey, May 1998), available at http://www.foreignpolicy-infocus.org/briefs/vol3/v3n14fdi_body.html
In this paper the author maintains that the U.S. government promotes unrestricted foreign direct investment (FDI) flows through trade agreements like NAFTA. The unrestricted FDI undermines economic security and creates destructive competition among communities and governments, forcing them to make concessions to firms in order to retain investment and maintain employment. The author asserts that U.S. law provisions incorporating the protection of workers' rights have had little effect due to a lack of political will in successive administrations. The U.S. policy favors the immediate interests of transnational corporations over those of workers and their communities, both home and abroad. In negotiations over NAFTA, the U.S. in essence secured the continental liberalization of FDI. They have promoted unrestricted FDI by encouraging the formation of export processing zones, which are sites exempt from domestic regulations, i.e. the maquiladora region of Mexico. Further, because NAFTA requires that each signatory grant "national treatment" to firms from all three countries, a signatory may be prevented from giving preferential treatment to its home corporations. This can hamper indigenous development. Lastly, NAFTA provides only capital, and not labor, with continent-wide citizenship rights. Mr. DeMartino recommends that the U.S. change its foreign policy to address the above concerns, suggesting that U.S. law should unilaterally impose U.S. environmental and labor standards and a corporate code of conduct on all U.S. firms operating internationally. He further suggests that Washington should seek a multilateral agreement addressing the same initiatives as above, but also pursue a global tax on transnationals, with the proceeds to be distributed internationally according to negotiated, equitable criteria. The author concludes stating that the U.S. must use multilateralism to defend workers, citizens, and the environment from the effects of unregulated FDI.Ari Kokko and Steven Globerman, Regional Economic Integration and Foreign Direct Investment: The North American Experience , 269 Working Paper Series in Economic and Finance (Oct. 1998).
The authors of this paper examine the relationship between regional economic integration and foreign direct investment (FDI) in North America. The paper discusses the bilateral free trade relationship between Canada and the U.S. (CUSTA) and the trilateral agreement of NAFTA. The authors conclude that the consequences of regional economic integration are sufficiently conditioned by inherited policies, as well as by existing macroeconomic conditions. They maintain that the trade and investment liberalization which preceded the implementation of NAFTA have contributed to the failure of NAFTA to create a discrete regime shift in intra-regional economic integration. They further state that because tariff rates were relatively low in many sectors prior to NAFTA, the incentive of non-NAFTA investors to establish production facilities in Mexico may have been dampened therefore diverting investment. After analysis of the EU experience, CUSTA, and NAFTA, the authors conclude that NAFTA has led to more modest impacts on intra-regional trade creation and extra-regional FDI stimulation than the EU experience. Hence, they claim that because there is a contrast between the EU and North American experiences with FDI and trade liberalization, that one should be cautioned against generalizing either experience when forecasting the impacts of expanded economic integration within Europe or the Americas.
Edward M. Graham, Erika Wada, Domestic Reform, Trade and Investment Liberalisation, Financial Crisis, and Foreign Direct Investment into Mexico , 23 The World Economy 777 (2000)
Mexican policies towards foreign direct investment (FDI) have substantially changed within the past twenty years. Once having employed relatively strict protectionist policies, Mexico later pursued unilateral liberalising measures throughout the 1980s, and eventually entered the North American Free Trade Area (NAFTA) in 1995. Throughout this period, Mexico also experienced two financial crises, in 1982 and 1994-95. Mexico’s divergent policies and experiences provide an interesting opportunity to examine the role of FDI in developing nations, particularly in regards to the following questions: 1) What factors have induced FDI entry into Mexico? 2) Has Mexico benefited from FDI?
The majority of FDI into Mexico has come from the United States. U.S. FDI grew at a stable, slow pace until 1988, when the amount of U.S. FDI increased sharply. The authors argue that the FDI increase was caused by unilateral Mexican reforms directed towards both the trade and financial sector in the mid-1980s, reforms designed to open the door to greater foreign involvement in the Mexican economy as a whole. NAFTA only further facilitated U.S. FDI into Mexico by creating an incentive to locate operations there for purposes of serving the expanded free trade area. The maquiladora phenomenon cannot account for the 1988 increase in FDI, since maquiladoras had been growing in number since well before then. Thus, the authors argue that FDI follows economic policy reforms made by host nations. This is important to consider because it contradicts anti-globalization critics, who assert that FDI undermines the authority of sovereign host nations to pursue economic policies. In Mexico’s case, the sharp increase in FDI was due to Mexico’s unilateral actions.
The authors argue that greater FDI into Mexico has also increased the wages of skilled laborers. Although anti-globalists assert that FDI diminishes wages and exploits labor, the authors argue that any discrepancies are due to greater wage inequality between skilled and unskilled workers, as FDI has increased skilled laborers’ wages relative to unskilled laborers, possibly creating hardships for unskilled workers, but it has not caused any wage decreases. Greater FDI has been associated with environmental pollution, but it is possible that the benefits of increased wages may act to offset such phenomena.
Robert C. Feenstra, Gordon H. Hanson, Foreign Direct Investment and Relative Wages: Evidence from Mexico’s Maquiladoras , 42 Journal of International Economics 371 (1997)
The authors conducted a study examining the impacts of foreign direct investment (FDI) from the United States on wages of Mexican workers using data from the 1980s. The focus of the study particularly concerned the connection between the “outsourcing” of U.S. based manufacturing to Mexico, a phenomenon associated with increasing wage inequality in both the U.S. and Mexico. The authors assert that as “skilled-labor” in the U.S. has become more associated with technology, what are considered traditional manufacturing jobs in the U.S. have moved to Mexico and become “skilled labor” relative to Mexico’s development. This has created a rise in the demand for “skilled labor” in both nations, and a consequent rise in wages. Prior to the 1980s, the Mexican government employed protectionist measures restricting foreign involvement in firm ownership and subsidizing domestic manufacturing industries from outside competition. The 1982 financial crisis prompted the government to further liberalize its policies, and in 1985 it announced its decision to join the General Agreement on Tariffs and Trade. During this period, FDI sharply increased from $478 million in 1983 to $3,635 million by 1989. A good portion of the FDI entering Mexico funneled towards the maquiladoras – largely foreign owned plants involved in secondary assembly of goods imported into Mexico and then exported upon completion with minimal duty requirements. Most maquiladoras assemble auto parts, electronics, or clothing apparel, and they mainly gather along the U.S.-Mexico border. The authors divided Mexico into five industrial regions, and employing data from the Mexican Industrial Census, found that the border region experienced the largest in crease in relative skilled labor demand in the country. The authors conclude that contrary to negative perceptions of foreign investment in Mexico, FDI is positively associated with a rise in skilled workers wages.
Gloria Hernandez Flores and Colin Lankshear, Facing NAFTA: Literacy and Work in Mexico , 44 Journal of Adolescent and Adult Literacy 240, Nov. 2000.
The authors suggest that Mexico must radically alter its literacy initiatives in order to compete with the U.S. and Canada. The NAFTA treaty will ideally result in a completely free trade area by the year 2010. This poses particular challenges to Mexico and its people. Ranked 48 in the United Nations Human Development Index, Mexico’s labor base will have to compete with the much better educated work forces of Canada and the U.S., respectively ranked 1 and 2 on the same index. Mexican society is rife with social and economic inequities. Estimated numbers of those living in poverty range from a conservative 20 million to as much as 72 million, in a nation whose total population is 96 million. Employees in Mexico’s formal economy work largely in very low-paying agricultural and manufacturing jobs. Not surprisingly, many Mexicans prefer to participate in Mexico’s thriving informal street economy. This overall situation looks grim in the face of NAFTA. On one hand, NAFTA will probably increase wages and living standards for those who participate in a formal economy driven by increased foreign investment. However, low wage work will ultimately pose an obstacle to development of a better educated and highly skilled workforce.
Official estimates suggest that 36 million Mexicans over the age of 15 have not completed some form of basic education, and some 800,000 young people drop out of basic education annually. Mexicans over 25 have completed an average of 4.7 years of basic education, whereas U.S. and Canadian citizens have completed an average of 12 or more years. The Mexican government estimates that some 6 million of its adults are illiterate, most of whom are elderly, indigenous peoples, or those living in remote areas of the country. However, many critics believe that in fact the figure is much higher, and suggest that large numbers of children and urban dwellers account for the majority of Mexico’s illiterate population. These critics point out that children and urban dwellers are perhaps the most significant to Mexico in terms of developing its workforce to compete with those of the US and Canada. Unfortunately, Mexican educational programs are not up to task. The government does provide both child and adult literacy programs, but they are often inconsistent or ineffective for a number of reasons. The Department of Adult Education provides vocational skills training, but typical courses involve dressmaking, typing, woodworking and other low level skills, not sufficient to prepare Mexicans for the global economy. Although Mexican companies are legally required to provide formal training and education of their employees, less than half of them actually do.
The authors suggest that in order to compensate for these problems, and in light of the present and future challenges posed by NAFTA, Mexico must radically alter its policies vis-à-vis education. Its government must expand its social welfare base and education programs, and invest much more money and resources into preparing its workforce for the future.
Howard Mann and Konrad von Moltke, NAFTA’s Chapter 11 and the Environment: Addressing the Impacts of the Investor-State Process on the Environment , International Institute for Sustainable Development (1999).
This paper begins by explaining foreign direct investment (FDI), and why it is critical to achieving sustainable development in developing countries, including Mexico. The authors note that without the right policy framework, FDI may pose risks to sustainable development, as investors focus on profits and not public interest. According to the authors, any policy framework should try to achieve both environmental sustainability and sustained growth and distribution. Two goals to address when trying to attain environmental sustainability include creating investor responsibilities and strengthening or protecting the host country’s environmental regulation and enforcement. With these goals in mind, the paper analyzes the provisions of NAFTA’s Chapter 11 on investment and the environment. After first tracing the history of the creation of Chapter 11, the authors analyze the investor-state dispute settlement process, as well as the substantive and procedural issues involved in Chapter 11 disputes. After analyzing specific cases under Chapter 11, the authors conclude that its provisions, designed to ensure security and predictability for investors, have actually created uncertainty and unpredictability for environmental regulators. Among the factors contributing to this result are: (1) the ability of an investor to initiate an action; (2) the uncertainty of interpretation in the provisions; and (3) the expansive definitions of measures covered and of investors able to use the process. Finally, it is suggested that the ultimate responsibility in improving the investor-state dispute settlement process should fall to NAFTA’s Free Trade Commission. The authors also make recommendations on improving the investor-state dispute settlement process.
ENRIQUE DUSSEL PETERS, POLARIZING MEXICO: THE IMPACT OF LIBERALIZATION STRATEGY, (2000)
In this book Prof. Dussel Peters looks at the structural changes that since the end of the 1980s have profoundly altered Mexico's economy and society. He asks whether the outcome has been a positive one, and argues that liberalization strategy in Mexico has been successful in achieving its stated, short-term aims. But in looking at fundamental issues of employment and income distribution, foreign trade, and industrial specialization (regional and countrywide) he demonstrates that the strategy has caused a polarization of both economy and society. The results, though perhaps not immediately apparent at the macro level, are creating unsustainable socioeconomic conditions. This scenario, Prof. Dussel Peters contends, is not unique to Mexico, but is relevant for other nations following similar development paths. He concludes with a discussion of alternative strategies for economic development. The book's contents include Introduction. The Debate Over Economic Development Since the 1980s. Liberalization Strategy in Mexico Since 1988. Macroeconomic Impacts of Liberalization. Effects on Manufacturing and Foreign Trade. Foreign Investments and Liberalization Strategy. The Costs of Liberalization: Social Development. Regional Development Since 1988: Two Case Studies. Conclusion.
Raul Hinojosa-Ojeda, Institution Building within the NAFTA Context: An Evaluation of Policy Initiations From the Transnational Grassroots, The Berkeley Roundtable on the International Economy (BRIE), BRIE Working Paper 95 (July 1999), available at http://brie.berkeley.edu/~briewww/pubs/pubs/wp/wp95.htm
This paper addresses the adoption and implementation of the “NAFTA Plus” side agreements, which include a set of NAFTA-related transnational institutions developed in concert with NAFTA. The author suggests that the transnational institutions were created as a result of an unusual strategic alliance made up of North American countries, Latino groups on both sides of the U.S.-Mexico border, and environmental groups. However, a stalemate has arisen, the author suggests, because of the withdrawal of support for the coalition by North American countries, which in turn has led Latino and environmental groups who also supported the coalition, to withdraw their support. The paper addresses many questions, including (1) how these groups ever came to work together, (2) how their goals of environmental sustainability, labor rights and standards, and community economic adjustment and development became highly important in NAFTA discussions, and (3) how this new set of actors (NGOs in the environmental and Latino communities) came to play such a large strategic role in the forming of NAFTA. As the paper addresses these questions, it places the discussion in the context of future North American integration and development. The discussion focuses on the potential impact that transnational societal networking (including transnational institutions) will have on the agenda of the countries and traditional economic actors involved in the process of North American integration and development.Gary C. Hufbauer, NAFTA In A Skeptical Age: The Way Forward, Institute for International Economics, (July 2000), available at http://www.iie.com/publications/papers/hufbauer0700.htm
This article examines “road rage” against globalization and the NAFTA. The author states that “road rage against globalization cannot be defined by individual trade agreements any better that road rage on the Los Angeles freeways can be explained by a fender bender mishap.” There are many discontented people, even though the United States economy has drastically improved. The author feels the causes run deep and understanding them is essential to policy makers who want to pilot NAFTA to deeper integration in the upcoming years.
The author states that the most successful economic model of our times combines macroeconomic stability with “Anglo-Saxon capitalism.” He characterizes macroeconomic stability as small fiscal deficits, low inflation, stable exchange rates and Anglo-Saxon capitalism, as private rather than public enterprises, highly flexible labor practices, spectacular compensation for corporate executives, and a decisive role for finance in shaping the direction of firms. He believes this Anglo-Saxon capitalism causes controversy because it “brings fast diffusion of new technologies and rapid productivity growth, as laggard firms are bought out, consolidated, and closed.” The author comments that this brand of market organization spells turbulence in the workforce as firms expand and contract, and as talent is being prized more than seniority.
The author lists three strategies that NAFTA protagonists could use to deepen the North American accord and drawbacks for each. First, he states the protagonists of freer trade could fight a pitched head-on battle with NAFTA naysayers. The downside to this strategy, he believes, is that the United States is complacent and disinterested in deepening relations with its NAFTA neighbors. Furthermore, he states most Americans do not see world commerce as an engine of domestic growth. Second, is his “Field of Dreams” answer to deepening NAFTA, which is to build North American institutions that are pathways to closer economic ties. Problems with this approach, he believes, are the executive branch departments and the Federal Reserve being jealous protectors of their authority and Congress disliking any signs of shared sovereignty. Third, he states a unilateral approach could be taken by Canada and Mexico to deepen NAFTA integration. But again, he states the drawback is that Canadian and Mexican leaders must act on the proposition that sovereignty is about economic performance, not symbols.